Budget blues see Sensex fall 2.8%

Concerns that the government may use next week’s Union Budget to try and counter rising prices at the cost of policies aimed at stimulating growth led to broad declines in the stock markets. And if trading in the derivatives market is any indication, the markets could be headed south again next week.

On Friday, the Bombay Stock Exchange’s benchmark Sensex fell 2.8%, or 388.78 points, to 13,633, and the National Stock Exchange’s Nifty by 101 points to 3,939. Over the past four days, the Sensex has fallen 770 points or 5.34%, its worst week in seven months. The one big macro-economic news of the day, that the wholesale inflation had declined to 6.63% in the week ended 10 February from 6.73% for the week ended 3 February, wasn’t enough to alter the pessimistic mood.

“There is hardly any buyer in the market and except for a large domestic institution, all others are selling,” said a senior executive of a foreign brokerage who did not wish to be named. On Wednesday and Thursday, foreign institutional investors, the main movers of the market, were net sellers to the extent of $60 million.

Friday also marked the beginning of a new three-month contract period in the derivatives market. Derivative contracts expire on the last Thursday of every month. New positions in Nifty futures, the most popular derivatives in the market, indicate that market participants expect a correction. Nifty March futures (contracts due in March) closed at a discount of 5% to the spot index.

Derivatives essentially reflect the price at which investors expect a stock to trade at a certain date in the future and if this is lower than the current price of the stocks, the market is headed for a fall.

“There has been a build up in short (sell) positions in the derivatives market during the last few trading days”, said Siddarth Bhamre, a derivatives fund manager with Angel Broking, a domestic brokerage. One reason for the fall could be new sell positions created in the derivatives market.

Harendra Kumar, head of research, ICICI Direct, an online broking firm, cited three factors for the market reaction. “Prices tend to be volatile during the futures and options expiry date. Besides, when the market is near its all-time high, correction and volatility are not unexpected. Finally, pre-Budget concerns affected various sectors,” he said.

Cement stocks, for instance, fell on speculation that the government was considering banning the export of cement as a further inflation-fighting measure, and banking stocks fell on concerns that rising interest rates would affect credit growth.

The markets also suffered from not enough money being put into stocks. “There is less fresh money flow because people are waiting for the Budget before committing money,” said Ketan Karani, vice-president, Kotak Securities.